A Reminder of the Risks from Lending Through Third Parties

Last month, BMO Harris Bank changed policies on auto lending to pay a flat percentage of the loan amount to auto dealers making loans (sound familiar?).

While the bank was under no obligation to do this and no other auto lenders have followed suit, the bank’s rationale should not escape the attention of lenders having active third-party origination channels.

The fact is, lenders with TPO channels have as much if not more legal risk from the actions of TPO partners as they do with their own originators. In other words, if a broker violates fair lending laws, the lender can be held responsible even though it did not originate the loan.

Moreover, if the overall pattern of lending amongst TPO channels leads to lending patterns evidencing a disparate impact or disparate treatment, the lender can be held accountable.

Furthermore, this potential liability does not end with fair lending. Now, with the development of vendor due diligence, the obligations on lenders to ensure that their TPO partners conform with all lending laws is paramount.

One can easily envision a scenario where a lender whose TPO channels were lagging in compliance could get hit with a claim of unfair and deceptive practices for consistent and systemic misrepresentations or omissions made by and/or through TPO channels. As such, lenders must take actions to ensure that their TPO channels have proper policies, proper training, and maintain appropriate compliance infrastructures to address compliance needs, including but not limited to fair lending.

My suggestion is that lenders should consider the compliance alternatives available to their TPO partners and incorporate a compliance related checklist into renewal decisions. At a minimum, to avoid and/or diminish the risks of liability, Lenders must demonstrate they have engaged their TPO channels in regard to compliance and taken actions consistent with their obligations and risk.

Comments (2)

Very true and prudent to suggest compliance related checklists with business partners. The partners should desire this as well to pass any audit test.

Posted by Michael B | Tuesday, May 20 2014 at 9:53AM ET

"Nevertheless, the most effective and accurate way of enforcing these laws is to evaluate mortgage brokers directly. Just as we do not hold Fannie Mae and Freddie Mac liable for the pricing decisions of the mortgage banks that sell them loans, neither should we hold lenders responsible for pricing decisions that are wholly out of their control." - Federal Reserve Bank of Cleveland (on disparate impact)- May 1999